Despite the numerous initiatives from President Zelensky in the field of economy, so far the most visible manifestation of the first half of his presidency remains depreciation. Not the depreciation of hryvnia, as usual, but of the US dollar.
Starting in June, the overseas currency "lost" 10% in relation to the hryvnia - from 26,85 hryvnias for 1 dollar to 24,18 according to the National Bank official rate. In total, since the beginning of the year, the dollar value has fallen against the hryvnia by about 15%.
Record for revaluation, but not for its duration
Since 2014, Ukrainians have been accustomed to the devaluation of hryvnia, which value has collapsed more than three times during this time - from 8 to 26 hryvnias for 1 dollar. So the current strengthening seems almost a miracle that has not happened before. Indeed, such an opinion is true, but only partially.
The 10% that the dollar lost over 4 months against the hryvnia is perhaps the record drop regarding the overseas currency, not related to the artificial rush of 2015, when some people gave up to 40 hryvnias for 1 USD.
However, the history of the Ukrainian hryvnia indicates that there were two periods for 2 and 3 years when the average annual hryvnia exchange rate against the dollar not only did not grow but even decreased.
This path began in 2001, when the average annual hryvnia exchange rate stopped at around 5,37 hryvnia per 1 dollar, while a year earlier the rate was 5,44. The rate dropped by another 5 kopecks during 2002, but a year later, the dollar added 1 kopeck to its value.
But the very next year, 2004, took away 2 kopecks from the dollar and fixed the average annual exchange rate at 5,31 hryvnia per 1 USD. 2005 was almost a triumph of the hryvnia, which managed to win 19 kopecks from the overseas currency and another 7 kopecks in 2006.
In 2007, the average annual rate remained the same as a year earlier – 5,05 hryvnia, but already in 2008 against the backdrop of the financial and economic crisis, it rose to 5,26. The next year was much harder, and in 2009 the hryvnia fell up to 7,79 for 1 dollar.
Since then, the average annual hryvnia - dollar exchange rate has only fallen, with the exception of 2013, when the average annual ratio of the national currency to the dollar remained at the level of 2012 – 7,99 hryvnia.
Does strong hryvnia mean economic growth?
The mechanism of influence on the national economy of the ratio of the hryvnia to the dollar is rather complicated, but it would seem that this can be judged, rather, by the results - the growth of the economy and gross domestic product.
In 2004-2007, when the longest revaluation of the hryvnia against the dollar took place, the domestic economy grew at a record pace: from 25.1% of nominal GDP growth in dollars in 2006 to 32.8% growth in 2005.
In 2009, when the devaluation occurred, the nominal GDP of Ukraine in dollars fell by 34.9%, and since then it has grown until 2014 at a much more modest pace than before.
At the same time, the period of growth of the domestic economy coincided with the growth of the world economy, which raised the prices of exported goods from Ukraine, primarily metals. Similarly, the fall of the economy in 2009 was caused, rather, by the outbreak of the global economic crisis, collapsing global markets and the national currency.
Yes, and the record hryvnia 10%revaluation in 2019 did not cause rapid growth of the domestic economy: according to the latest state report, industrial production fell in August, making 98.6% of July indicators.
In general, in January-August 2019, the Ukrainian industry grew by only 0.1% compared to the same period in 2018. However, here, rather, the seasonal factor of summer plays a role, when business activity is noticeably reduced.
The strengthening of hryvnia ruins the budget
Suddenly, the Ministry of Finance of Ukraine opposed the strengthening of the hryvnia against the dollar. The department, which seemed to be vitally interested in the growth of the national currency, called it the “main challenge” for fulfilling the 2019 budget on income.
According to the Ministry of Finance, the average annual hryvnia exchange rate for January-August of the current year at 26,6 hryvnias per 1 dollar instead of the forecast of 28,2 hryvnias brought the income from VAT down to 87,6% of the plan.
According to economic expert Olexander Okhrimenko, there is nothing surprising in the position of the Ministry of Finance.
"Instead of filling the budget due to economic growth, increasing household incomes and the number of taxes paid, the Ministry of Finance is taking a simpler path - filling the state treasury with VAT on imports of goods through the devaluation of the hryvnia.
In essence, it’s a robbery of the population, since the VAT included in the price of the goods is simply taken out of the pockets of buyers, which is much easier than achieving economic growth,” the expert says.
In addition to the Ministry of Finance, domestic exporters have grounds for dissatisfaction with the increase of the hryvnia rate, which now will generate 15% less hryvnias for dollars earned on world markets than at the beginning of the year. In the same way, the number of hryvnias from VAT compensation decreased by 15%.
“Exporters will undoubtedly suffer from the appreciation of the hryvnia. At the same time, our main exporter is big business, which, will receive less income from exports, but this obviously will not have disastrous consequences, given their scale,” Olexander Okhrimenko added.
At the same time, according to the Ukrainian Institute of the Future economic expert, the strengthening of the hryvnia against the dollar in the future may lead to an increase in the foreign trade deficit.
"Now this trend is especially inconspicuous, but if you do not develop your own production, in the future this gap can seriously grow," the expert said.
So far, according to the State Statistics Service, the foreign trade deficit of Ukraine in the first half of 2019 amounted to $ 3,74 billion.
Olexander Okhrimenko named three areas in which the effect of the hryvnia revaluation is most positive:
1) if not price reduction, then at least its stabilization;
2) the strengthening of the national currency makes the real salary slightly higher, that is, it increases the well-being of the population;
3) depreciation of the national currency is always a bad signal for a business that wants to take a break and wait a moment, while strengthening the course inspire the business to invest more in the development of the economy.
Vitaliy Shapran fron the National Bank recalls the positive role of the hryvnia revaluation in relation to the public debt of Ukraine, because the strengthening of the national currency leads to a decrease in the cost of servicing the public debt, part of which is denominated in US dollars and euros.
“In my opinion, revaluation has a positive effect on inflationary expectations of the population and business, - they become more modest. The population feels more comfortable with the revaluation trend, since the majority of incomes are tied to the hryvnia, and revaluation for many is an expansion of opportunities to purchase imports. And this is 90-95% of cars, household appliances, office equipment, etc.," the expert emphasizes.
What's next? The choice between economic growth and its collapse
Experts, noting the positive impact on the domestic economy, unanimously talk about the dangers of this process, which could cause serious depreciation of the hryvnia in the future.
So, economist Viktor Skarshevsky directly linked the hryvnia exchange rate appreciation with the growth of the domestic government loan bond portfolio in the hands of foreign buyers, which has grown 15.4 times since the beginning of the year - from 6,3 billion hryvnias to 97,8 billion hryvnias.
Since government bonds are in hryvnia, foreigners sell dollars to buy hryvnias, thereby pouring more than $ 3 billion into the national financial market, increasing their supply.
- money from government bonds do not work for the economy, but will finance the state budget deficit;
- with a 15-fold increase in the currency volume on the government bonds market, foreign direct investment in the country continues to decline (in the 1st quarter of 2019, we received a total of $ 484 million);
- the money invested in government bonds by foreign persons is essentially speculative capital, which can leave Ukraine at any time.
According to Skarshevsky, domestic government bonds are attractive to financial speculators, allowing them to earn up to 30% per annum due to the profitability of the securities themselves and the depreciation of the dollar.
“If at some point, for any internal or external reason (a slowdown in the global economy, the global financial crisis, a sharp drop in world prices for metal, ore, grain, etc.), non-resident speculators will lose interest in Ukrainian government bonds and decide to take profits and, accordingly, withdraw the currency from Ukraine, then the speculative-revaluation cross will instantly turn into a speculative-devaluation cross, "the expert summarizes.
He considers the high hryvnia exchange rate artificial due to speculative capital and other factors affecting the exchange rate. He also mentions a decreased capital outflow from the country in anticipation of the launch of the land market. In this sense, even the IMF’s negative conclusion didn’t really affect the situation.
All this, he said, leads to the fact that Ukraine today accumulates risks for the future.
“If we manage to invest the funds we received in the development of the economy and its real sector, Ukraine will see economic growth, and if we change our expectations from positive to negative, we will see an abrupt devaluation with an outflow of speculative capital,” the expert said.
As he admitted, it is not yet possible to predict which of the two scenarios is more likely, and he personally does not see any reason in the near future for a drastic change in the situation, and therefore his expectations are still “moderately positive”.
Of course, the NBU is building up its foreign exchange reserves through capital inflows, but this "airbag", in my opinion, is not intended to change trends in the foreign exchange market, but only to eliminate sharp fluctuations, "says Olexander Okhrimenko, who sees the main threat to the hryvnia exchange rate and the economy in the government bonds market, more precisely in its opacity.
“Without all the information, it is difficult to make a forecast about the future of the hryvnia. If domestic government bonds are bought by serious foreign investment funds, you can be calm - they see a future for themselves, and serious shocks should not be expected.
If they are bought through offshore companies, it is most likely that our business or international financial speculators are acting, and then there are serious risks both for the hryvnia and the economy in the form of capital withdrawal and a sharp devaluation of our currency, ”the expert believes.